MASTERCARD Signals
Technologies and trends shaping the future of commerce
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Q4 2019 Edition
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INTRODUCTION
Quantum Computing
Gig Economy
Elements of Cryptocurrency
5G
Digital for the Next Billion Users
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A profound shift
is taking place in payments and commerce; a shift that will redefine the future of our business and the businesses of many others across the digital ecosystem. The coming together of powerful market forces—changing customer preferences, global macroeconomic shifts, and the speed and scale of technological advancements, from artificial intelligence and blockchain, to 5G and quantum computing—will lead to this transformation in our world. At Mastercard, we are proud to be driving change and innovation, not simply reacting to it. Our commitment to “what’s next” is guided by a strong, strategic foundation and a deep sense of responsibility to our customers and partners. We innovate and experiment with new technologies both as a tenet of our business and as the basis for creating superior experiences—anticipating future customer needs and building next-generation solutions to meet them. The pages that follow share our insights and foresight on the future of payments and commerce, exploring the critical driving forces and current initiatives that will transform our communities and businesses for the better over the next decade.
Maja Lapcevic SVP, Innovation Management & Marketing, Products & Innovation
Femi Odunuga SVP, Digital Future, Products & Innovation
Overview
Imagine it was possible to solve complex mathematical problems exponentially faster than today’s most advanced supercomputers. What kinds of problems would we tackle? How might this expansive computing power impact our business and our industry? The emerging field of Quantum Computing may enable this very reality far sooner than anyone expects.
In a classical computer, microprocessors with integrated circuits containing billions of tiny transistors serve as the basis for computation. Each of these billions of transistors can be set to one of two states, ON (1) or OFF (0), creating binary digits or bits. These bits then enable the calculations and processing required to bring everything from pocket calculators to virtual reality headsets to life. In quantum computing, bits are replaced with “quantum bits” or simply qubits. Qubits are created by isolating subatomic particles—a feat in and of itself. Once these qubits are isolated, researchers can take advantage of quantum mechanical properties to unlock exponentially more computational power than can be delivered by a classical bit. In this position paper, we will discuss the key characteristics or mechanics of quantum computing that enable this computational power, the use cases quantum computers could address, and the timelines against which success is measured.
Classical computers vs quantum computers
Principles of Quantum Mechanics
THREE PRINCIPLES OF QUANTUM MECHANICS
A detailed overview of quantum mechanics is beyond the scope ofthis paper; however, it will be helpful to touch on three underlying principles of quantum computing:
Unlike bits that may be placed into either one of two states (1 or 0), qubits can be placed in an infinite number of states including 1, 0, and all of the possible intervals between—at the same time. This is known as Superposition. As an analog, imagine a bit is represented by a coin with a clear head and tail. A qubit then is represented by the sphere that emerges when the coin is spun on its axis. With some probability, the spinning coin is a mix of both heads and tails. Only by interfering with/observing the spinning coin do we reveal its actual state.
Superposition
1
1 2 3
2
Entanglement
When pairs or groups of quantum particles are entangled, they behave in ways that are perfectly correlated with one another—even when separated at great distance. Entanglement allows qubits to communicate with each other, enabling the effects of superposition and resulting in the exponential scaling of computing power.
3
Exponential Computation
In classical computing, each bit allows the computer to be placed in a total of n² states (where n is the number of bits). Thus, a 64-bit computer can be placed in a total of 4,096 states. Conversely, each added qubit in a quantum computing system allows for the system to be placed in 2ⁿ states (where n is the numberof qubits). As a result, a 64-qubit computer can be placed in 18,446,744,073,709,551,616 (more than eighteen quintillion) possible states.
POSSIBLE USE CASES
Quantum computers are not a replacement for classical computers. They may, however, address a very specific set of questions that classical computers are ill-equipped to tackle:
Not surprisingly, quantum computers may make it possible to model the behavior of quantum systems, i.e. systems in nature that have quantum properties. Simulating molecules at the atomic level, for example, is largely beyond the capabilities of a classical super-computer. This kind of modeling could have profound implications for the testing and development of new medicines, materials, and chemicals. In financial services, at least one investment bank has explored the idea of modeling investment portfolios based on naturally occurring phenomena with quantum properties. This work is of course highly theoretical—for example, using models of the sun’s surface to develop hypotheses about the volatility of investment risk—and potentially decades away from mainstream application.
MODELING QUANTUM SYSTEMS
LARGE OPTIMIZATION PROBLEMS
Optimization problems are another often identified use case for quantum computing. Optimization problems attempt to improve the overall performance of a system across a number of variables. For example, quantum computing could maximize the number of convenient airline routes while minimizing flight time, fuel costs, personnel, and carbon footprint. In digital commerce, retailers could realize meaningful improvements to the bottom line from better optimizing shipping and distribution operations. Consider, for example, all of the factors impacting the efficiency of Amazon’s fulfillment network—location, purchase volume, parcel dimensions, fuel costs, vehicle speed, to name a few—and it’s easy to see where classical computing models reach their limit.
A quantum computer, developed by IBM, is reminiscent of the early mainframe computers used in the middle of the 20th century. Most of the structure shown here is required to isolate the qubits from interference and maintain a temperature just a few degrees north of absolute zero (0˚ Kelvin).
Optimization could also be applied to transaction and settlement behavior. For example, at least one financial institution is exploring the use of quantum computing to optimize securities transaction settlements. This could be especially useful in environments with varying credit, collateral and liquidity constraints. A similar idea would be to use quantum computing to identify the optimal source of funds for any given transaction. Using data about where the consumer is, what they are purchasing, the balances of the consumer’s accounts, the costs and benefits associated with a given purchase instrument (rates, penalties, impact on credit score, rewards, etc.), it would be theoretically possible to build an optimization program that chooses the best possible financial instrument for a given purchase. With the power of 5G, this kind of analysis and information sharing could theoretically happen in real time at the point of sale. Lastly, we note that quantum computing may be used to speed up the training of Artificial Intelligence (AI). Both Machine Learning and Deep Learning use complex optimization functions to evaluate probabilities and determine an output. This computationally intense process, it is believed, can be accelerated and improved with quantum computing.
(continued)
PRIME NUMBER FACTORING
One use case particularly well-suited for quantum computing is factoring large numbers. Factoring is a mathematical tool fundamental to cryptography. For small numbers, the process is relatively straightforward and can be done with pen and paper, but things get quite a bit more complicated as the numbers get larger. Using a quantum computing algorithm (Shor’s Algorithm), it has been demonstrated that a quantum computer of sufficient power could factor very large numbers in relatively short periods of time. This has raised some alarms across the cryptography community, as, in theory, quantum computing could be used to undermine at least some of the more common cryptographic algorithms used to secure online communications. As a result, efforts have been underway for several years to develop post-quantum or quantum-proof cryptography. These new cryptographic functions are powerful enough to withstand or at least deter malicious intent that may arrive from quantum computing in the near term.
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QUANTUM CRYPTOGRAPHY
While quantum computing could introduce challenges for encryption and cryptography, “quantum key distribution” or “quantum cryptography” could theoretically enable even greater encryption technologies. One scenario for quantum cryptography takes advantage of the fact that quantum particles exist in multiple states at the same time (superposition) and do not reveal their actual state until they are observed. In addition, the conditions under which the observation is being made determine the ultimate state of the particle. The implication of these quantum mechanical properties is that even if someone was able to observe an encrypted message, they would need to do so under very specific conditions. As these conditions could be changed for every message, the costs associated with breaking a message’s encryption would far outweigh the value of the data in the message itself. The second scenario considers a mechanism to protect against unwanted attempts to eavesdrop upon encrypted messages. The underlying idea is to use the property of entanglement to immediately recognize any attempts to “observe” the message—a quantum tripwire, so to speak.
FUTURE CONSIDERATIONS
THE QUEST FOR QUANTUM SUPREMACY
At some point, researchers will aim to produce quantum computers with certain technical characteristics (e.g., sufficient number of qubits, low error rates, and shallow computational depth) to achieve what is known as Quantum Supremacy. Quantum supremacy is the point at which a quantum computer will outperform a classical computer for certain, well-defined mathematical tasks. In September 2019, Google published a draft paper to NASA’s website claiming to have achieved quantum supremacy. Using a quantum computer—specifically developed for the application in question—Google’s researchers were able to perform a mathematical task predicted to take almost 10,000 years to complete with a classical computer in just over 3 minutes. While some experts have discounted the magnitude of the feat due to the contrived nature of the problem, the results certainly encourage continued exploration around the potential of quantum computing.
A mathematical task predicted to take almost 10,000 years to complete with a classical computer was performed in just over 3 minutes.
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THE END OF CLASSICAL COMPUTING?
It should be emphasized that reaching quantum supremacy will not make classical computers obsolete. For one, classical computers are acting as both input and output mechanisms. Additionally, as previously discussed, quantum computers are theorized to be useful for only a limited (albeit interesting) set of use cases. Despite recent advances, quantum computing as a commercial application appears to be in a still very nascent state. Google, IBM, Intel, and others continue to announce higher and higher qubit quantum computers and processors, and we expect to see accelerating progress in the field. Still, most experts believe we are more than a few years, if not decades, away from producing quantum computers with any material commercial utility.
“A classical computation is like a solo voice—one line of pure tones succeeding each other. A quantum computation is like a symphony—many lines of tones interfering with one another.”
— Seth Lloyd
AT Mastercard
Our product and innovation teams are continuously exploring how emerging technologies and computational paradigms may support efforts to deliver safe, simple, and smart solutions. In the specific case of quantum computing, we have taken and continue to take steps to future-proof our network security and evaluate new analytic tools that might further inform our understanding of commerce and payment trends.
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GIG ECONOMY
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The Gig Economy refers to marketplaces that enable commerce between consumers for the procurement of services. These services may be true services (e.g., transportation, professional, and household), or they may be physical assets delivered “as a service” (e.g., real estate, vehicle sharing). In addition to physically connecting buyers and sellers, these marketplaces define the business terms or contracts between the parties, facilitate payment and compensation, and provide value-adding services to support acquisition and retention of participants in the marketplace (e.g., reviews, bank accounts, scheduling services).
“Among the biggest beneficiaries of the gig economy are workers who have been stuck on the margins of our traditional jobs economy. Stay-at-home parents, retired people, the elderly, students, and people with disabilities now have more options to work as much as they want, and when, where, and how they want, in order to generate income, develop skills, or pursue a passion.”
— Harvard Business Review, 2016
DRIVING FORCES
While the idea of gig/part-time work is by no means new, a combination of consumer and technology trends are driving a renaissance of sorts for the gig economy. On the technology side, the advent of digital networks designed to connect freelancers with gigs has significantly lowered the bar for market participants to connect and created incredible value for the platforms themselves. On the consumer side, whether by necessity or self-interest, consumers are embracing the opportunity to earn income through the gig economy. In some cases, this may result in “full-time” gig workers. In other cases, consumers may use gig economy platforms to supplement traditional employment or other sources of income (e.g., social security).
Constituents of the gig economy
Consumers looking to outsource a certain task
Technology Platforms that enable the interaction between the parties
Freelancers willing to perform tasks in exchange for compensation
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Consumers
We estimate the gig economy currently generates $204 billion in gross volume, with the most lucrative sector being transportation-based services (e.g., ride-sharing, restaurant delivery) at 58% of this value. Going forward, the volume of gig economy transactions is projected to grow by a CAGR of 17% with a gross volume of ~$455 billion by 2023, due to factors like evolving societal attitudes around asset sharing and increasing digitization rates in emerging markets.
The Opportunity
PLATFORMS
Globally, we have identified more than 60 gig economy platforms providing business and payment services, marketing, and distribution for freelancers. As freelancers develop client relationships through the platform, they may seek to move business off the platform—fueling the evolution of our traditional definition of a merchant.
FREELANCERS
There were approximately 40.7 million freelancers worldwide participating in the gig economy in 2018. By 2023, this number is expected to grow to 78 million—representing more than 80% growth over the next five years. Additionally, roughly 65% of every dollar of gross volume in the gig economy gets paid out as a disbursement to the freelancer. This metric (66%) can vary considerably by market and platform.
The gig economy is not slowing down
$204
$135
$248
$164
$297
$196
$348
$230
$401
$265
$455
$300
(Global projections, $B)
Gross Volume
Estimated Disbursements
11
2018
2019
2020
2021
2022
2023
PAYMENTS AND GIG PLATFORMS
Future considerations
Ask anyone about their first experiences with ride-sharing apps like Uber and Lyft and almost invariably they will mention the payment experience or, more precisely, the lack thereof. It’s not surprising then to see continued innovation around payment services spread across the industry. For example, some leading gig platforms have developed their own branded e-wallet products (GrabPay, Go-Pay, Ola) in a model that mimics the strategies followed by super apps like Alibaba and WeChat. A branded payment solution (in addition to layering relevant and engaging services) potentially gives these providers an opportunity to expand their share of consumer attention and ultimately payments. While this model may be harder to emulate in more developed economies where consumers’ digital payment habits and affinities are more entrenched, we cannot fully ignore it. For example, Uber’s partnership with Masabi to make train and bus tickets available to its riders has generated early interest. According to one report, Uber trips in Denver that start or end at transit stations have grown 11.6%. These contextually relevant, connected experiences could provide an entry to increasingly diverse commerce experiences all facilitated by Uber’s (non) payment experience. We also expect gig platforms to, at a minimum, continue to experiment with financial services on the back of open banking. Already gig platforms have introduced financing solutions for the assets gig workers rely on to participate in the platform. Platforms like Uber and Grab are already offering automotive financing solutions to freelancers, and we expect these trends to continue. Continuing this logic, it’s easy to see how an expanded platform of products and services could eventually position gig platforms as more of an all-in-one lifestyle destination for freelancers. Some providers are exploring the opportunity to deliver budgeting and money management tools to gig workers. And Mastercard’s own research suggests a high degree of demand for financial tools that accommodate the lifestyles of gig workers. Imagine a scenario where gig workers wake up with a view of their anticipated schedule, earnings, customized deals for relevant purchases, educational content, and tax and expense management services.
Uber trips in Denver that start or end at transit stations have grown 11.6%.
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HEADWINDS
There are of course significant headwinds pushing against the growth of today’s largest gig platforms, not the least of which are regulatory and municipal efforts to both protect gig workers and insulate the legacy providers that gig platforms are hoping to supplant. Another trend is the migration of gig services off of the platforms. Under this scenario, consumers and freelancers construct alternate, cost-saving relationships for both booking and payment that disintermediate the platform. Looking further out, we are interested in seeing what role automation, autonomous vehicles, and AI have in shaping the development of the gig economy. Will these technologies eliminate gig jobs, displace gig platforms (as recently predicted by Oracle Founder, Larry Ellison), or will they encourage the expansion of gig economy into new, higher skilled markets?
Gig economy platforms continue to grow in size and scope. Today’s ~40 million freelancers are expected to double by 2023, creating new opportunity for Mastercard’s customers and partners. Mastercard is investing in the gig economy not only to meet the needs of both freelancers and gig economy platforms, but to ensure our customers and partners are represented. Our investments in the gig economy not only drive value through strategic partnerships, but also allow our customers the opportunity to reach the growing number of freelancers and their unique payment needs. As the gig segment continues to grow, we are taking advantage of opportunities to deliver products and services to all gig economy stakeholders. In addition, we are carefully monitoring the ecosystem to identify new sources of value. As the gig economy begins to blur the traditional definition of consumers and merchants, we will continue to innovate on new products and services to extend our franchise into the future.
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1. LEDGERS
In any system of financial accounting, a ledger performs the function of recording inflows (credits) and outflows (debits) from a specific account and across multiple accounts. Historically, financial ledgers have been centralized and controlled by a single trusted source. Retail banks traditionally use a centralized ledger to record transactions against accounts held by the bank. Bank A cannot see Bank B’s ledger, and vice versa. Mastercard’s clearing and settlement activities operate using a ledger of transactions. Supporting the operation of a ledger are underlying protocols that govern who can post transactions to the ledger, what kind of transactions can be posted, etc. These protocols ensure that 1) the history of transactions is known, 2) the order of transactions is known, and 3) all transactions recorded on the ledger are valid. The element of trust must also be present. For obvious reasons, financial activity is less likely to occur when potential parties to transactions do not trust the accuracy of the ledger or the ability of the ledger holder to ultimately settle transactions. In a private or centralized ledger, trust is conferred through licenses, reputation and other guarantees.
The importance of having an accurate record of transactions, including timing and history, is illustrated in the following example. Specifically, reordering lines 7 and 8 places the business owner in an overdrawn situation.
The Importance of Protocols
#
Date
Description
Debits
Credits
Balance
4
5
6
7
8
9
1/2/19
1/8/19
1/9/19
1/13/19
1/14/19
1/23/19
1/30/19
Cash deposit
Rent payment
Equipment rental
Supplier 1
Cash receivables
Supplier 2
Supplier 3
Payroll
$2,000
$4,000
$2,200
$6,000
$1,500
$2,300
$9,000
$6,500
$9,500
$7,000
$3,000
$800
$1,300
$9,300
$7,300
$10,800
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2. DISTRIBUTED LEDGERS
As an alternative to a central trusted authority, copies of a shared ledger could be held by each node, or participant, in a system of exchange. In this distributed ledger model, transactions are broadcast to all of the nodes, and each node is responsible for recording all transactions. Distributed ledgers built using a blockchain take advantage of cryptography to theoretically achieve better operating efficiencies (lower costs), increased transparency, and immutability. Immutability in this case can be taken to mean permanence—once posted, a transaction cannot be altered. While this eliminates the need for a central, trusted authority, ledgers still must overcome a few challenges. For example, if transactions are being broadcast to multiple participants, how does each participant trust they are getting the same transactions—in the same order—as everyone else? This is effectively accomplished by a mathematical version of “follow the leader” whereby nodes compete with one another for the right to post the next entry or block of entries to the distributed ledger. This competition is often referred to as computational work or computational effort.
Centralized Ledgers vs Distributed Ledgers
BANK A
BANK B
BANK C
BANK D
COPY OF SHARED LEDGER
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3. CRYPTOGRAPHIC FUNCTIONS
A key component in cryptocurrency is the cryptographic function—a special type of mathematical formula capable of converting a data message of an indeterminate size (any length) into a string of bits with a fixed length. This output is called a hash.
Cryptographic functions have five useful characteristics:
The same input results in the same output every time. You can try this using any online SHA 256 hash calculator and typing in “Signals” (without quotes or spaces) The hash calculation must be quick and relatively simple for a computer to complete Predicting the hash is an infeasible task It is infeasible to generate two messages resulting in the same hash Small changes to the original message will change the hashin unpredictable ways
SHA 256 is a commonly used cryptographic function. This specific function converts any data input into a 256-bit hexadecimal string (64 characters = 0-9 and A-F)
SHA 256
SHA was developed by the U.S. National Security Agency and has thus far not been cracked. SHA 256 is the standard supporting today’s SSL certificates, which secure communication between web applications and the browser.
If we input “Signals” into SHA 256 we get the following hash:
Signals
88b01c8a4bff9a08720595 b6b56b8de43beb06d64d1c 58eff683de7eaf3645e5
Changing the message even slightly, results in a new, unpredictable 64-character hash:
siGnals
db6128f99b40ffa04ff298 151acb6e9fa880ff92dbba 4fb1e6ce71bd09e8aa92
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4. PROOF OF WORK
If we append a number (nonce) to any message, e.g., Signals0 or Signals76872, each new nonce would cause our cryptographic function to generate an unpredictable, unique hash. With enough guesses, we can find a nonce that results in a hash beginning with “0.” It is also true that with enough guesses, we could find a different nonce that, appended to the original message, results in a hash starting with 30 “0”s (followed by 34 additional hexadecimal characters). It might look like this: This ends up being extremely useful for two reasons. First, the only way to find this nonce is to guess at all of the possible numbers. Signals1, Signals2, Signals3 … until we get lucky. The odds are roughly one in a billion. Second, once the nonce is identified, anyone could input this message nonce pair in our cryptographic function to quickly generate a hash and visually confirm it meets the required characteristic of (in our example) 30 zeroes. This initial string of 30 zeroes is our Proof of Work, i.e., an easily verifiable characteristic of a hash resulting from a specific messagenonce pair.
An element of data that is difficult to produce but easy to verify.
000000000000000000000000000000f8 e428dee1bb9c9a43dce9fd09ca230381
Proof of work
Perhaps another way to think about Proof of Work is in relation to the time it takes to achieve the required conditions. The higher the bar (i.e., the more zeroes required in the prefix of the hash), the more guesses one will need to make to find the “winning” nonce. Some cryptocurrencies, like Bitcoin, use this as a way to meter the number of blocks that get created. Under the Bitcoin protocol, new blocks are added at a rate of roughly one every 10 minutes. As more miners enter the market, or as computational power accelerates, the required number of preceding zeroes gets raised.
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5. BLOCKCHAINS
Most, but not all, cryptocurrencies are organized around a blockchain. A blockchain is composed of individual blocks representing the links in the chain. Each block, once added to the chain, represents a validated entry on the distributed ledger. In addition to the transactions that make up the message, each block contains the “winning” nonce (i.e., that generates a hash achieving the requisite Proof of Work). A block must also contain other details aggregated in the header. Importantly, the hash of the previous block in the chain is included in the header. The inclusion of the previous hash is what holds the chain together,since changing any component of any prior message will change the hash and break the chain. The first block in a blockchain is known as the .
Genesis Block
genesis block
Hash of the previous block
BLOCK 001
BLOCK 002
BLOCK 003
Header
Transaction Data
Nonce
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6. Mining
The process by which new blocks get created and added to the blockchain is called . Transactions in a distributed ledger are broadcast to all of the nodes on the blockchain. Thus, at any given time, there is a basket of proposed transactions available to be added to a block. Miners assemble blocks from the basket of available transactions. They then compete with all of the other miners to find the nonce that meets the Proof of Work requirement. Once found, the blockis immediately shared with all of the other nodes who can quickly validate the solution via the Proof of Work. When a predetermined number (e.g., >51%) of nodes validate the solution, the new block is added to the existing blockchain. In many cryptocurrencies, a block reward is earned when a miner successfully adds a block to the blockchain. This reward is typically a predetermined amount of the cryptocurrency. Because each block is essentially a race to guess the nonce that delivers the Proof of Work, mining requires a lot of computing power. The largest mining operations (reportedly as much as 70% of all mining) are based in China. Countries like Canada, Sweden, and Iceland, too, are home to significant mining operations resulting from low-cost alternative energy sources (e.g., geothermal, hydro) and a cold climate that reduces the costs of maintaining server temperatures.
mining
Mining activity by country
(Megawatts of power consumed)
111
60
27
China
Georgia
U.S.
Canada
Sweden
Iceland
Estonia
Estimates unavailable for Russia, Poland, Venezuela, Thailand, and Hong Kong. Bitcoin Exchange Guide, 2018.
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7. TRANSACTION FEES
In some cases, cryptocurrencies may limit the number of transactions or the amount of data that can be placed in a block by a miner. In the case of Bitcoin, for example, each block may not exceed 1MB. This scarcity creates an interesting scenario in which transaction fees are highly reflective (in aggregate) of consumer demand for transaction processing. Starting from the beginning, we know that transactions are broadcast to the nodes and held in a pool of potential transactions. We also know that miners determine which transactions will get aggregated into blocks. The question then is how can an individual be sure that his or her transactions are being added to the blockchain? The answer is through economic incentives or transaction fees. Potential transactions broadcast to the nodes may, at the originator’s discretion, be appended with transaction fees to incentivize miners to add them to their blocks. Transaction fees, and the decision over whether to include them, are determined by the transaction originator. Once a transaction is added to a block and the block is added to the chain, the miner will receive the transaction fee.
Average offered transaction fees for “immediate” or “next block” processing of Bitcoin transactions show little observed correlation to either the underlying price or transaction volume of Bitcoin.
(2019 YTD)
Daily Volume
1/1/19
$1
$2
$3
$4
$5
$6
$7
$6.25
Average Transaction Fee
Price of 1 Bitcoin
$
3/1/19
5/1/19
7/1/19
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8. COMMON CRYPTOCURRENCIES
There are more than 2,000 cryptocurrencies in circulation today; however, the market is highly concentrated among the top five currencies: Bitcoin, Ether, XRP, Litecoin, and Bitcoin Cash. In fact, these publicly traded assets account for more than 80% of the total market for cryptocurrencies. Bitcoin, the original and most well-known decentralized cryptocurrency, deserves mention not only due to its market share (64%) but also its relatively significant acceptance footprint of 15K venues, including companies like Overstock, Newegg, and even KFC (Canada). Generally speaking, cryptocurrencies tend to be volatile instruments in that the price can fluctuate significantly over short periods of time. This volatility can be attributed to a number of factors, including the fact that cryptocurrency has no intrinsic value, has been subject to significant security breaches, and (today) has little to no regulatory oversight. In an effort to limit this volatility, a class of cryptocurrency assets known as stablecoins has emerged. Stablecoins are pegged or tied to underlying assets like fiat currency, commodities like gold and other cryptocurrencies. This allows the stablecoin to share a risk profile that is more similar to the backing collateral. Despite these benefits, however, stablecoins account for less than 2% of the cryptocurrency market.
Five cryptocurrencies constitute more than 80% of the market
Bitcoin 64%
All others 19%
XRP 5%
Litecoin 2%
Ether 8%
Bitcoin Cash 2%
Cryptocurrency
Value in circulation ($B)
Bitcoin
Ether
170
22
XRP
Litecoin
Bitcoin Cash
All others
49
Market capitalization shown as on 7/29/19
9. CRYPTOCURRENCY WALLETS
Like other forms of digital payment, cryptocurrency is generally stored in a digital wallet. These wallets not only provide a secure environment in which multiple cryptocurrencies can be housed, but they also facilitate the origination and receiving of transactions. However, cryptocurrency wallets do have some unique features that set them apart from traditional digital wallets. For example, cryptocurrency wallets may limit the types of currency they will support. Another difference comes from the fact that cryptocurrency, like a payment card account number, may be held in either what is referred to as hot or cold storage. In , the wallet is connected to the internet. This means the wallet may reside in a browser or an app on a connected device. Hot wallets provide a certain liquidity to cryptocurrency because they can be readily transacted with. They are also understood to be less secure since they are connected and therefore subject to digital theft. In , wallets are not connected. This includes both hardware devices and “paper wallets.” Hardware-based cold storage wallets operate like thumb drives on steroids and may include mechanical buttons to initiate transactions. Paper wallets are just that—printed or handwritten records of the private keys and public addresses associated with the owned cryptocurrency.
Users may hold multiple cryptocurrency wallets to accomodate different cryptographic assets and storage options
hot storage
cold storage
2.9 - 5.8 million users
Active users of cryptocurrency (worldwide, 2017)
5.8 - 11.5 million wallets
Active cryptocurrency wallets (worldwide, 2017)
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10. CRYPTOCURRENCY EXCHANGES
Consumers are able to buy, sell, and trade crypto assets over cryptocurrency exchanges. Between 2015 and 2018, the number of cryptocurrency exchanges grew threefold to more than 200. Based on the exchange and the location, consumers may use any number of methods to deposit funds, including cards, bank transfers, wires, etc. With these funds, consumers can then purchase cryptocurrency through the exchange much like consumers could trade in foreign fiat currency. Not all cryptocurrencies are available on all exchanges, so avid traders of cryptocurrency are likely to have multiple exchange accounts. Some exchanges may require the use of proprietary wallets and offer tools that enable merchants to accept cryptocurrency transactions. Money laundering at the exchange level is a significant concern for regulators around the globe. Recent guidance from the Financial Action Task Force (FATF) affecting inter-exchange transactions of more than $1,000/€1,000 now requires the originating exchange to “immediately and securely” share identifying information about both the sender and the intended recipient with the beneficiary exchange. This is intended to not only deter money laundering but also to facilitate the enforcement of economic sanctions and the blacklisting of suspected terrorist or criminal activity.
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5g
25
DEPLOYMENT
5G refers to what will be the fifth generation digital cellular network. 5G replaces the current generation, 4G, with vastly improved speed, connection capacity and reduced latency.
Early implementations of 5G will be rolled out in 2019, and broader deployments are expected in 2020 with adoption through 2023. To achieve full scale adoption, both the telcos and the device manufacturers will need to have infrastructure and devices in market, respectively.
4G
3G
2G
1G
Voice
Text
Mobile data
Cloud, mobile broadband
Massive data capacity
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Features
SPEED
5G is dramatically faster than 4G. Where 4G is capable of delivering 10 to 20 Mbps (megabits per second), 5G will allow data transmission in the range of 10 to 20 Gbps (gigabits per second), making 5G as much as 100 to 200 times faster than 4G. To put this into context, a movie download that would take 5 minutes today could be downloaded in under 4 seconds.
CONNECTIONS
Finally, 5G will provide much more network capacity by expanding networks into new spectrums, i.e., radio frequencies allocated to the mobile industry and other sectors for communication over the airwaves, in addition to existing ones.
LATENCY
A second feature of 5G is its extremely low latency. Latency is the delay between the time data is sent and when it is received. On average, 4G delivers between 100 to 200 milliseconds of latency. 5G is capable of delivering communication with 1 millisecond of latency—effectively real time.
Contactless Payment
0.350s
Human Reaction Time
0.250s
4G Latency
0.150s
5G Latency
0.001s
MOBILE COMMERCE GROWTH
Improvement in mobile shopping speed and experience is expected to grow mobile commerce by as much as $12 billion over the next 3 years as 5G penetration scales (Adobe Digital Insights, 2018).
5G enables use cases that have been slow to evolve in today’s 4G environment, just as prior generation of networks, 1/2/3G, would not have been able to deliver the type of robust applications we have today. For example, applications like Snapchat, Uber, or Waze could never have been possible on 2G or 3G just a few years ago. These innovations have significant impact on interactions and economic activity. An Adobe Digital Insights study forecasted a $12 billion lift in U.S. mobile commerce by 2021 from 5G. Research from Qualcomm suggests 5G will add as much as $12.9 trillion to the global economy by 2035. Similarly, 5G will likely facilitate new commerce experiences and accelerate the growth of digital payments.
NEW FORMS OF ACCEPTANCE
With enhanced speed of 5G combined with intelligent edge computing on devices, every mobile device can potentially be enabled to be a point-of-sale terminal for acceptance of contactless payments, ushering in a new wave of acceptance models.
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OFFLINE-ONLINE INTEGRATION
The trend of digital in offline commerce, which has resulted in early deployments of cashierless stores like AmazonGo, will be accelerated with 5G enabling high-speed data and image transfers and processing at less cost per bit.
AUGMENTED AND VIRTUAL REALITY
In addition, improved experiences in augmented and virtual reality will also enable offline-to-online use cases like the ability to buy items just by putting them in the line of vision of the phone camera or taking virtual store walks from home. These will potentially transform retail experiences and truly begin to blur the lines between offline and online commerce.
OTHERS
The impact of 5G on other technologies, including IoT, autonomous cars and drones, will result in growth of digital commerce—for example, in-car commerce and instant drone deliveries.
5G represents an exponential leap forward for digital and its integration with the physical world. The real-time sharing of data at extremely high velocity will enable new business models, technologies and consumer behaviors. Mastercard is committed to working with our customers and partners to take advantage of the opportunities presented by 5G. As more and more devices become commerce enabled, issuers, and merchants will have opportunities to interact more fluidly with their consumers and business partners. At the same time, concerns about privacy and the always-present risk of fraud remain top of mind. We look forward to innovating with you, our customers and partners on the 5G future.
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DIGITAL FOR THE NEXT BILLION USERS
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UNDERSTANDING
From a payments and commerce perspective, digitizing the Next Billion Users refers to the accelerating adoption of digital payments by previously non-participating or under-participating populations. As digital payments proliferate on the backs of government programs, alternative networks, and maturing local schemes, the digital economy is growing to include new consumer groups with diverse cultural, socio-economic, and technological profiles. In this position paper, we explore some of the opportunities and challenges found in engaging this diverse market segment.
Developing a detailed understanding of a market is an early requirement for success in any business. In the case of the Next Billion Users, this exercise must be undertaken at a far more targeted level. Take for example M-Pesa, a mobile money initiative launched in 2007 by Safaricom in Kenya. Despite considerable achievements in raising consumer welfare in its home country, M-Pesa has (thus far) been unable to emulate similar levels of success in other neighboring geographies. Simply put, there will be not a one-size-fits-all solution. As we develop products that engage the Next Billion Users, we will need to take into account all facets of the people, cultures, and technologies we are targeting. In doing so, we will unlock considerable value, not only for our own business but for the communities and geographies with which we engage.
“We expect emerging economies overall to represent 62% THE NEXT BILLION DEVICES of total consumption growth between 2015 and 2030, the equivalent of $15.5 trillion, with 22% of that coming from China alone.”
— McKinsey, 2018
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THE NEXT BILLION PEOPLE
NEW DELIVERY MODELS
Across the Next Billion Users, variations in socioeconomic status, languages, religion, and societal norms will contribute to differences in the types, volumes, and frequency of transactions ultimately made by them. Government disbursements and peer-to-peer commerce may overshadow traditional e-commerce. Transactions may be supported by fiat currency or something else entirely. What we think of as everyday purchases may include basic necessities like water, heat, and light.
To what degree consumers among the Next Billion Users are banked (or are willing to be banked) is also important. While some consumers will have traditional bank relationships through which “standard” bank products are available, many will access digital financial services via non-traditional sources like telecommunications carriers, retailers, government programs, NGOs, or other potential financial intermediaries. These represent opportunities to extend and build new partnerships and delivery models with different bundles of services like healthcare and financial well-being.
A FORCE FOR GOOD
Financial literacy as it pertains to credit, lending and budgeting will vary significantly and sometimes unexpectedly across segments. Similarly, the degree of internet familiarity or savvy among the Next Billion Users will not be consistent. This is especially relevant in efforts to mitigate the potential for fraud and protect data privacy. One quickly comes to the conclusion that security and education will be foundational and differentiating elements of bringing the Next Billion Users into the digital economy.
Measuring the next billion users
51%
2011
62%
69%
2014
2017
The percent of adults with an account at a financial institution or through a mobile money provider has grown steadily from 2011 to 2017.
515M
Between 2014 and 2017, more than 500 million adults opened new financial accounts, including traditional banking and mobile money accounts.
900M
80M
Developed Markets
Emerging Markets
Roughly 90 percent of new internet users will come from emerging markets over the next 3-5 years.
$1.8T
$3.9T
The total value of digitally influenced commerce in emerging markets is predicted to reach $3.9 T by 2022—more than doubling the volume observed in 2017.
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THE NEXT BILLION devices
ENTER VOICE
The demographic variation across the Next Billion Users is also reflected in the devices and technology available and in use today. This technology component presents another opportunity to reimagine how financial services are delivered and consumed.
One technology trend worth monitoring is the growing interest in and sophistication around voice-based interactions. Similar to the way that wireless networks have leap-frogged wire-line networks in developing nations, we might expect consumers to turn to voice over screen-based/text-based interactions. Precipitating voice adoption will be the continued investment in the underlying communications network that today may only deliver intermittent and low bandwidth access (if at all). Short-term network limitations aside, voice can provide a viable mechanism to circumvent the larger challenge of literacy.
MANY DEVICES, MANY CAPABILITIES
For the time being at least, devices in market will vary considerably. In some geographies, older smartphones and even feature phones may be the primary device by which consumers access digital services. These devices—with lower RAM and processing power, smaller screens, and reduced battery life—will constrain and even prohibit access to solutions built with the latest and greatest technology in mind. At the same time, cheaper devices are making inroads with brands like Tecno and Mara offering sub-$150 smartphones capable of accessing popular apps like Twitter and Facebook. These lower-priced devices will help accelerate consumer adoption of digital solutions to lower income brackets.
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THE ROLE OF PAYMENTS
Reaching the Next Billion Users of digital financial services will not be easy for any one entity. It requires a diverse aggregation of stakeholders, including governments, NGOs, community groups, and businesses at both the local and global scale. It requires building out the underlying infrastructure to support market adoption (acceptance). It requires monitoring participation of both users and providers to mitigate against predatory behavior and other bad outcomes (governance). And it involves a deep-set commitment to invest in a future where total returns will outpace the fiscal ROI.
Engaging the Next Billion Users also provides an opportunity to rethink our understanding of the role payments plays in people’s lives, in connecting buyers and sellers and in guaranteeing transactions. In reaching the Next Billion Users, especially for those in developing economies, we can test our underlying assumptions about payments and technology. With each new market, we have an invitation to explore new capabilities, processes and business models. These experiments may ultimately help us rethink our core business and allow us to better prepare for potentially disruptive threats. This is not to say that we should ignore our existing assets and capabilities, but rather understand that our technology and solutions are the result of decades of evolution from a simple plastic card in a physical wallet. If we could do it all over again, what would we improve?
THE REAL KPIs
Always, at the heart of the matter is the underlying requirement to make people’s lives easier, safer, and more fulfilling. Payments—and the access and flexibility it represents—has the power to facilitate these virtues. Whether it is enabling long-distance transactions between farmers and buyers, enabling small and micro merchants to build and operate a business, or levelling the playing field for credit and lending to facilitate the delivery of community-improving capital equipment and services, our technology can and does make a difference. At this level, payments and the brands behind them, become less about transactions and more about inspiring growth and empowerment.
The past 75 years have been one of the most successful periods of economic growth in human history. Unfortunately, the benefits of growth have not always been broadly shared or experienced. Technology is improving lives and connecting people in unprecedented ways. However, it is also disrupting old ways of working and widening the gap between the haves and have nots. Mastercard is uniquely positioned to advance inclusive growth. We are a trusted network that builds ecosystems through partnerships, which allows us to connect people to, and help them to benefit from, the digital economy. By bolstering the economy and building scalable solutions, we can help unlock potential and build pathways to a more secure future.
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Mastercard Signals
explores the technology and trends shaping the evolution of commerce in today’s digital-first world.
For more information
on these topics or other digital topics of interest, please contact the Digital Future team at: digital.future@mastercard.com or your Mastercard account representative.
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